The following is a guest blog by Sam Thompson with Community Southern Bank. The views expressed are not necessarily those of GeorgiaMoves.com
Here are some common credit-related questions that I hear frequently:
How do I go about re-establishing my credit if I lost my home in a short sale or foreclosure?
What should I do if I filed bankruptcy several years ago to re-establish my credit and increase my credit scores?
What should I do if I was out of work for a year and have been delinquent on all of my credit-related obligations?
What should I do if I have never had any credit cards, car loans, bank loans or any kind of traditional credit?
I will answer these questions and more in this article. Let’s start by explaining one thing about the credit scoring system that is important. I frequently talk to customers that tell me that they have been working on improving their credit scores by paying things off, such as collections and the like. The key thing to remember here is that paying bad accounts off will not in itself improve your credit scores. What you have to do is take things a step further and actually demonstrate that you are making your payments on existing open accounts on time or open new accounts and do the same. Most mortgage loan programs require that you have done that for a minimum time period of 12 months and have at least three open, satisfactory accounts. These accounts can consist of installment loans, credit cards or any accounts that are reported to the credit bureau on a monthly basis. Paying off delinquent accounts is important but simply paying off previous bad accounts will not help you improve your credit scores. That is the most important lesson for you to learn. Acceptable credit scores are primarily a function of demonstrating that you have paid your credit obligations in a timely manner. Paying off delinquent accounts or collections can actually lower your scores in the short run, because the credit bureau sees that as recent activity on a delinquent account.
So with that said, let’s address the questions I posed at the beginning of this article. In general, underwriting guidelines require that a customer wait a minimum of three years if they lost their previous home to foreclosure or even had to sell via a “short sale” that was approved by their lender. Either case resulted in a loss to the lender or “investor”. Some lenders will require that the borrower wait up to seven years after a foreclosure before they will consider granting another loan. So the time frame involved on both these categories is really “case by case” as determined by a particular lender.Bankruptcies are a little more uniform. The most lenient mortgage loan program out there, FHA, will allow a borrower to qualify to purchase another home after two full years from the discharge of the Chapter 7 and the re-establishment of credit.
Re-establishing credit is not easy. Consumers must be persistent in trying to do that through such sources as secured loans or credit cards. A secured credit card is a credit card that is opened with a deposit equal to the amount of the line of credit that has been established. Someone with a car that is paid off could possibly put the car up for collateral to open a small installment loan or line of credit with a bank or credit union.
The answer to the next question about delinquent credit is basically common sense. The only thing that really heals this situation is time and overcoming the life situation that created the delinquency. Someone that has had delinquent credit will, in general, need to correct the situation and demonstrate for a 12 month period that they have overcome the issue and are back on track in terms of their personal obligations. The days of trying to hire a “credit repair” company to come in and remove delinquencies that are real are over.
Finally, let’s look at the situation for someone who has never had any traditional credit established. Consumers in this category can qualify for FHA financing if they can demonstrate that they have paid their rent and utilities on time for the past 1-2 years. Typically this type of customer will have no credit score at all since they have never had credit, but they can obtain financing if they demonstrate the above along with the fact that they have the capacity to make a mortgage payment. One of the best cases for approval is the customer that has been paying $1,000 a month in rent and wants to purchase a home with a mortgage payment that is within $50-100 a month of that same amount. It is only common sense that if they can afford rent at that amount, that they should be okay with a similar amount for a mortgage payment. There are other expenses that come with home ownership, such as home maintenance and possibly slightly higher utilities. That is why underwriters like to see savings accounts and 401ks that can be used to take care of those unexpected out of pocket expenses when needed. And, if the customer has savings to fall back on, they should be able to continue to make their credit related payments on time and keep their credit scores at an acceptable level.
If you would like to ask specific information about your credit situation, please give me a call or send me an email.
Sr. Mortgage Consultant